The Chancellor called it “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921,” others have called it “the death of the annuity”, with specialist provider Partnership Assurance’s share prices falling 55 per cent on Budget day. Beyond the speculation we do know that, following the reforms, retirees will be in a position where they can take their whole pot as cash, only paying income tax on 75 per cent, and free to blow it however they choose.
While it can be tempting to predict such an extreme outcome on the basis of George Osborne’s Budget statement, in reality there are many ways the market could turn. Whatever happens, annuities’ position on the at-retirement landscape is now unstable, and a pensions revolution is under way.
Changes to come
The new rules essentially mean that savers will be able to take all of their pension at any time after the age of 55. The ability to take 25 per cent of the pot as a tax-free lump sum has not changed, but if cashed in, what remains will be taxed at marginal rates, not 55 per cent as before. The remaining 75 per cent will be considered as income for the tax year in which it was withdrawn.
Nothing will change about the way individuals save into a pension, and they will continue to receive immediate tax relief at their marginal rate on personal contributions.
Between now and the plans being implemented in April 2015, the government will cut the income requirement for flexible drawdown from £20,000 to £12,000 and raise the capped drawdown limit from 120 per cent to 150 per cent of the Government Actuary’s Department (Gad) rate. It will increase the size of a lump-sum small pot to £10,000 and increase the overall size of pension savings that can be taken as a lump sum from £18,000 to £30,000. Both Standard Life and Aviva have lowered the minimum amount customers need for its drawdown products from £50,000 to £30,000, in line with the new upper limit for trivial commutation.
“This is a huge ‘get out of jail free’ card for the industry,” says Bruce Moss, strategy director of financial planning and forecasting solutions provider eValue, who believes the Budget announcements show that the government has greater trust in financial services, and were a huge boost in the face of an industry that has seen regulation upon regulation.
Pension pot free-for-all
